Cyclone Shaheen caused huge uninsured losses: OCCI

In this two-part deep dive into Cyclone Shaheen’s deadly aftermath, the Observer speaks to a veteran of Oman’s insurance industry for his insights on policy measures and initiatives that must be considered by authorities to mitigate the devastating effects of natural disasters on the Omani economy

MUSCAT, Oct 10

The destruction unleashed by Cyclone Shaheen as its slammed through North and South Al Batinah governorates of eastern Oman last week has been described as “catastrophic” with echoes of Gonu – the monstrous storm that hit the Sultanate in 2007, says a key official of Oman Chamber of Commerce and Industry (OCCI).

Murtadha M J Ibrahim al Jamalani (pictured), Chairman of OCCI’s Finance & Insurance Committee, has been a leading voice in shaping the insurance landscape in the Sultanate – from the private sector’s standpoint.

“Cyclone Shaheen inflicted huge damage as it swept through these governorates on October 3-4, claiming several lives, but also destroying infrastructure and disrupting economic activity on a major scale. Besides inundating private residential buildings and vehicles, floodwaters unleashed by the storm also destroyed farms, livestock and fishing boats, while also causing immense economic harm to shops, supermarkets, commercial and residential real estate and construction activity across these regions.”

Business losses

In remarks to the Observer, the official warned that Shaheen, as with a succession of cyclones and storms that have hit Oman with increasing frequency in recent years, is threatening to inflict severe pain on the financials of insurance companies operating in the Sultanate.

“We envision a significant impact for the operating results and balance sheets of insurance firms because of the scale of the exposures, encompassing their Motor, Property and Engineering classes of the business insurance portfolios. Furthermore, business interruption is also key risk and can represent a significant contribution to the overall claims cost,” he said.

While an accurate estimate of the losses inflicted by the cyclone across the Batinah coast is yet to be fully assessed, Al Jamalani believes that the bulk of these losses are essentially uninsured, meaning that the burden of recovery, repair, rehabilitation and compensation essentially falls on the government and the survivors themselves.

He explained: “The insurers’ exposure to storm, tempest and floods events, at least on their property books, is limited by the low level of insurance penetration for personal property and home contents insurance in particular. Property Insurance underwriting restrictions do not permit the commercial insurance companies to offer insurance protection to certain properties constructed from inferior materials and situated in certain areas i.e. the mouth of wadis, built on hillsides or mountainsides, located close to the sea and in the low-lying areas, and so on. As a result, my guess is that total insured losses resulting from Cyclone Shaheen and the ensuing floods may be low, but the uninsured losses could be huge, not including the economic disruption and other inconveniences imposed on local communities.”

In any event, given the relatively modest size of the insurance economy in the Sultanate, the insurance industry does not have the wherewithal to absorb exposures to losses linked to natural disasters and catastrophes, the official warns.

Total gross direct written premiums of insurance companies across all classes of insurance amounted to RO 465.895 million in 2020, which was down 4.3 per cent from the previous year’s total of RO 486.582 million, according to CMA figures. Gross written premium in the Motor Insurance class declined 12.7 per cent to RO 113.364 million in 2020, down from RO 129.802 million in 2019. In the Property Insurance class, gross written premium rose 23.4 per cent to RO 71.376 million, up from RO 57.845 in year. Gross written premium for the Engineering Insurance class (Construction All Risks) dipped 3.1 per cent to RO 22.312 in 2020, down from RO 23.024 million in 2019.

Premium retention

The net insurance premium retention ratio of the insurance companies, which is a key indicator of the overall financial health of the sector, fell 4 percentage points to 56.2 per cent for all classes of the insurance business in 2020, down from a ratio of 60.54 per cent in 2019, said Al Jamalani.

“For the Motor Insurance Class, the premium retention ratio was 90.09 per cent in 2020, down from 91.44 per cent in 2019, a drop of 1.4 percentage points. The corresponding ratio for the Property Insurance class was 10.32 per cent, which was down 2.6 percentage points from the previous year’s figure of 12.95 per cent. For the Engineering Insurance class of the business, the premium retention ratio was 14.90 per cent in 2020, which was lower by 3.5 per cent from the previous year’s figure of 18.16 per cent in 2019.”

Compared with the overall size of Omani economy, the insurance sector’s share of the GDP continues to be paltry – a reflection of low insurance penetration in the Sultanate, Al Jamalani lamented.

Lack of awareness continues to be the bane of the sector although four decades have elapsed since the Insurance Companies Law was introduced in 1979, he noted.

“Insurance awareness is the responsibility of both insurance companies and the regulator,” the official stressed. “Awareness by the companies comes through advertising and public relations exercises. Awareness by the regulator can be built introductory programmes and the implementation of rules and regulations governing this industry.”

(Tomorrow – Part II)